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7 TOPICS FOR FURTHER STUDY. Copyright © 2006 Thomson Learning 21 The Theory of Consumer Choice.

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Presentation on theme: "7 TOPICS FOR FURTHER STUDY. Copyright © 2006 Thomson Learning 21 The Theory of Consumer Choice."— Presentation transcript:

1 7 TOPICS FOR FURTHER STUDY

2 Copyright © 2006 Thomson Learning 21 The Theory of Consumer Choice

3 Copyright © 2006 Thomson Learning The Consumer’s Budget Constraint

4 Figure 1 The Consumer’s Budget Constraint Quantity of Pizza Quantity of Pepsi 0 Consumer’s budget constraint 500 B 100 A Copyright©2004 South-Western

5 Figure 1 The Consumer’s Budget Constraint Quantity of Pizza Quantity of Pepsi 0 Consumer’s budget constraint 500 B C 100 A Copyright©2004 South-Western

6 Figure 2 The Consumer’s Preferences Quantity of Pizza Quantity of Pepsi 0 Indifference curve,I1I1 I2I2 C B A D Copyright©2004 South-Western

7 Figure 2 The Consumer’s Preferences Quantity of Pizza Quantity of Pepsi 0 Indifference curve,I1I1 I2I2 1 MRS C B A D Copyright©2004 South-Western

8 Figure 2 The Consumer’s Preferences Quantity of Pizza Quantity of Pepsi 0 Indifference curve,I1I1 I2I2 C B A D Copyright©2004 South-Western

9 Figure 2 The Consumer’s Preferences Quantity of Pizza Quantity of Pepsi 0 Indifference curve,I1I1 Copyright©2004 South-Western

10 Figure 3 The Impossibility of Intersecting Indifference Curves Quantity of Pizza Quantity of Pepsi 0 C A B Copyright©2004 South-Western

11 Figure 4 Bowed Indifference Curves Quantity of Pizza Quantity of Pepsi 0 Indifference curve 8 3 A 3 7 B 1 MRS = 6 1 MRS = Copyright©2004 South-Western

12 Figure 5 Perfect Substitutes and Perfect Complements 50p coins 0 10p coins (a) Perfect Substitutes I1I1 I2I2 I3I Copyright©2004 South-Western

13 Figure 5 Perfect Substitutes and Perfect Complements Right Shoes 0 Left Shoes (b) Perfect Complements I1I1 I2I Copyright©2004 South-Western

14 Figure 6 The Consumer’s Optimum Quantity of Pizza Quantity of Pepsi 0 Budget constraint I1I1 I2I2 I3I3 Optimum A B Copyright©2004 South-Western

15 Figure 7 An Increase in Income Quantity of Pizza Quantity of Pepsi 0 New budget constraint I1I1 I2I raising pizza consumption and Pepsi consumption. Initial budget constraint 1. An increase in income shifts the budget constraint outward... Initial optimum New optimum Copyright©2004 South-Western

16 Figure 8 An Inferior Good Quantity of Pizza Quantity of Pepsi 0 Initial budget constraint New budget constraint I1I1 I2I2 1. When an increase in income shifts the budget constraint outward but Pepsi consumption falls, making Pepsi an inferior good pizza consumption rises, making pizza a normal good... Initial optimum New optimum Copyright©2004 South-Western

17 Figure 9 A Change in Price Quantity of Pizza Quantity of Pepsi 0 1,000 D 500 B 100 A I1I1 I2I2 Initial optimum New budget constraint Initial budget constraint 1. A fall in the price of Pepsi rotates the budget constraint outward and raising Pepsi consumption reducing pizza consumption... New optimum Copyright©2004 South-Western

18 Figure 10 Income and Substitution Effects Quantity of Pizza Quantity of Pepsi 0 I1I1 I2I2 A Initial optimum New budget constraint Initial budget constraint Substitution effect Substitution effect Income effect Income effect B CNew optimum Copyright©2004 South-Western

19 Table 1 Income and Substitution Effects When the Price of Pepsi Falls Copyright©2004 South-Western

20 Figure 11 Deriving the Demand Curve Quantity of Pizza 0 Demand (a) The Consumer’s Optimum Quantity of Pepsi 0 Price of Pepsi (b) The Demand Curve for Pepsi Quantity of Pepsi 250 $2 A B I1I1 I2I2 New budget constraint Initial budget constraint 750 B 250 A Copyright©2004 South-Western

21 Figure 12 A Giffen Good Quantity of Meat Quantity of Potatoes 0 I2I2 I1I1 Initial budget constraint New budget constraint D A B which increases potato consumption if potatoes are a Giffen good. Optimum with low price of potatoes Optimum with high price of potatoes E C 1. An increase in the price of potatoes rotates the budget constraint inward... Copyright©2004 South-Western

22 Figure 13 The Work-Leisure Decision Hours of Leisure 0 Consumption € 5, I3I3 I2I2 I1I1 Optimum 2, Copyright©2004 South-Western

23 Figure 14 An Increase in the Wage Hours of Leisure 0 Consumption (a) For a person with these preferences... Hours of Labor Supplied 0 Wage... the labor supply curve slopes upward. I1I1 I2I2 BC 2 BC hours of leisure decrease and hours of labor increase. 1. When the wage rises... Labor supply Copyright©2004 South-Western

24 Figure 14 An Increase in the Wage Hours of Leisure 0 Consumption (b) For a person with these preferences... Hours of Labor Supplied 0 Wage... the labor supply curve slopes backward. I1I1 I2I2 BC 2 BC 1 1. When the wage rises hours of leisure increase and hours of labor decrease. Labor supply Copyright©2004 South-Western

25 Figure 15 The Consumption-Saving Decision Consumption when Young 0 Consumption when Old € 110, ,000 I3I3 I2I2 I1I1 Budget constraint 55,000 € 50,000 Optimum Copyright©2004 South-Western

26 Figure 16 An Increase in the Interest Rate 0 (a) Higher Interest Rate Raises Saving(b) Higher Interest Rate Lowers Saving Consumption when Old I1I1 I2I2 BC 1 BC 2 0 I1I1 I2I2 BC 1 BC 2 Consumption when Old Consumption when Young 1. A higher interest rate rotates the budget constraint outward A higher interest rate rotates the budget constraint outward resulting in lower consumption when young and, thus, higher saving resulting in higher consumption when young and, thus, lower saving. Consumption when Young Copyright©2004 South-Western


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